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The pitfalls of bespoke ADR clauses

For the first time in quite a while I am in the enviable position of having more than one adjudication enforcement case to choose to write about this week. In the end I plumped for Beach Homes v Hazell and Hazell as it raises some interesting points about bespoke dispute resolution clauses. It is a judgment of Mr Jonathan Acton Davis QC, one of the army of Deputy High Court judges currently sitting in the TCC.

Beach Homes v Hazell and Hazell – the background

In 2014, Beach Homes and Mr and Mrs Hazell entered into a contract for Beach Homes to carry out the construction of a house in Wokingham. The form of the contract is not clear, but under the heading of “Variations” it provided:

“Should the client require the contract work to be varied he shall issue a formal instruction, in writing, setting out what is required. If a verbal instruction is given in the first instance we will confirm this in writing to the client and this will have the same effect.

All variations and extra work to be calculated on a cost plus profit and overheads at 25% basis unless a rate has been agreed prior and a variation order has been signed before commencement of extra works. Should agreement not be possible at the final stage, the value of the variations to be ascertained by an independent quantity surveyor whose valuation shall be binding. The quantity surveyor’s fees shall be divided equally and paid by each party.

In the event of a dispute, it shall be agreed that it would be resolved through adjudication proceedings and that the adjudicator should be appointed by the RCIS [sic].”

A dispute arose as to whether the works were complete and as to the value of the final account. On 19 October 2016, Beach Homes referred the dispute to adjudication and expert determination and RICS appointed Mr Douglas Judkins. Few details of the adjudication and expert determination are given, but Mr Judkins did not hand down his decision until 7 April 2017, so it was evidently a long and protracted process. Mr Judkins decided that Mr and Mrs Hazell should pay Beach Homes £128,826.04, plus interest.

In brief, the Hazells didn’t pay and so, on 10 July 2017, Beach Homes started enforcement proceedings and made an application for summary judgment. The Hazells didn’t serve an acknowledgement of service and default judgment was entered on 3 August 2017. Later in August 2017 Beach Homes applied for, and was granted, an interim charging order over the house.

The Hazells, clearing realising that they might be in a spot of bother, made an application to the court. On 28 June 2018, the judge heard their applications to set aside the default judgment, to declare that Mr Judkins’ decision was invalid and/or should not be enforced and not to grant Beach Homes a final charging order.

Beach Homes v Hazell and Hazell – the judgment

In a nutshell, things didn’t go well for the Hazells. The judge refused to set the default judgment aside, refused to make any declaration that Mr Judkins’ decision was invalid and/or should not be enforced, and he granted the final charging order. As the judge tactfully put it, despite the valiant efforts of their counsel, “authority and principle were against him”.

Looking in a bit more detail, the Hazells had four arguments, namely that:

Mr Judkins did not act in accordance with the notice of intention to refer.

It is the first two arguments I want to consider as they concern the bespoke ADR provisions. The judge agreed with Mr Judkins that the arguments based on UTCCR should be rejected, although he didn’t explain why. The judge also dismissed the fourth argument for the obvious reason that whether the substance of Mr Judkins’ decision was right or wrong “is of no relevant in an enforcement action”.

The first argument

Returning to the first argument, the Hazells argued that the notice of adjudication made no reference to expert determination and relied solely on the final paragraph of the variations clause concerning adjudication, as well as the Scheme for Constriction Contracts 1998. Despite this, because the adjudicator construed the adjudication clause to mean that disputes concerning variations would be resolved by expert determination and all other disputes by adjudication, he proceeded on the basis that he had been appointed as both an expert and adjudicator.

The Hazells therefore argued that the adjudicator’s activity as an expert was conducted without jurisdiction, and I confess I have some sympathy with that argument. However, their problem was that they played a full part in the proceedings despite knowing that Mr Judkins believed that he had jurisdiction to conduct the expert determination and adjudication, and they did not reserve their position. The judge therefore concluded that the Hazells had waived any jurisdictional argument they may have had.

The second argument

Although the Hazells’ first argument may have had some merit, their second was weaker in my view. They argued that Mr Judkins’ construction of the variations clause was wrong, and that:

“… the clause relates to Variations only, the value of which must be agreed before the work is carried out but, if the cost cannot be so agreed, valuation of the variations is to be determined by an independent quantity surveyor. The Defendants argue that the procedure does not apply to works they claim to have been already carried out and that the Claimant had no right to refer a question to adjudication regarding the completed variations ‘or anything else for that matter’.”

The judge agreed with Mr Judkins’ construction of the variations clause and rejected the Hazells’ argument that only disputes concerning the value of variations may be referred to adjudication. The judge said that, having agreed to accept the determination of the surveyor as binding (as expert determination is), there cannot be any dispute concerning the surveyor’s determination capable of reference to adjudication. Therefore, the adjudication provisions must refer to all other matters in dispute between the parties.

The judge also said that, even if Mr Judkins’ interpretation was wrong, it would make no difference because:

“… it is not the role of the Court to second guess the Arbitrator’s [sic] Decision when considering the matter of enforcement. The Decision is to be enforced irrespective of any errors of fact or law.”

I think that is an interesting comment because it is at least arguable that Mr Judkins’ conclusion concerning the underlying basis of what he was empowered to do went to his jurisdiction, which could have been opened up by the court. Ultimately, nothing turns on that though as the judge evidently agreed with Mr Judkins’ construction of the clause.

My thoughts

One can only presume that all parties were satisfied that the Hazells’ were actually residential occupiers within the meaning of section 106 of the Construction Act 1996. If they were not, and the contract actually comprised a construction contract for the purposes of the Construction Act 1996, then the Hazells could clearly have argued that the variations provision conflicted with section 108. This is because it did not permit variations to be dealt with by means of adjudication in the first instance and, as such, the clause should have been struck out and replaced with the adjudication provisions of the Scheme for Construction Contracts 1998.

As the Hazells were evidently residential occupiers for the purposes of section 106, their contract was not subject to the Construction Act 1996 and, as such, the parties were free to include a bespoke ADR clause.

I confess that I don’t see the merits of the clause the parties agreed to, as rarely will it be the case that a dispute arising from the construction of a house is limited to variations. It seems to make little sense to me to try and separate out variations from other disputes, such as those concerning remeasured works, loss and expense, extensions of time, and so on. Ultimately, it has resulted in further litigation and wasted costs.

A building contract is not a lease where questions such as rent reviews can easily be hived off and dealt with by a different dispute resolver to other disputes under the lease. The Practical Law summary of the case questions whether this separation of disputes is “desirable in most situations and the best way of drafting a contract”, but I think that it is putting it too mildly. In my view, it is plainly undesirable.

“Well, in the words of Bananarama, it’s been a cruel cruel summer: well, at least August has. The weather has been shocking in the UK and I’ve heard more than one person say that they’ve already put their central heating on.”

So, while I am tempted to complain about the Middle Eastern temperatures in my office today, I won’t, as it is better than the cruel, cruel summer of three years ago. Rather, I wish you all a relaxing and enjoyable remainder of your summer.